When you’re an employee, your employer takes care of PAYE (Pay As You Earn) and handles your income tax. However, if you’re self-employed, it’s your responsibility to pay your own income tax.
For instance, if your business earned $100,000, the income tax on that amount would be slightly under $24,000. Paying such a lump sum all at once can be challenging. That’s where provisional tax comes in, as it breaks down your income tax into manageable installments spread throughout the year, easing your tax burden.
Provisional tax divides your income tax into periodic payments. The payment frequency can range from twice a year (October 28 and May 7) to as frequent as monthly.
The due dates depend on whether you are GST registered and the payment option you choose. There are four payment options available:
1. Standard option
2. Estimation option
3. Ratio option
4. Accounting income method (AIM)
The standard option calculates provisional tax based on your previous year’s income tax plus 5%. This amount, divided by the number of payment installments you choose per year, determines what you owe for each installment. Feel free to consult with us about the other options and which one might be the most suitable for your circumstances.
At the end of the tax year, your provisional tax payments may not align precisely with your actual liability. You might have paid too much (if you earned less than expected), leading to a tax refund, or too little (if you earned more), resulting in an additional payment owed to the Inland Revenue. We can assist you in estimating a more accurate figure and guide you in selecting the appropriate payment option while calculating your payments.
If your total income tax for the previous year was below $5,000 (approximately an income below $34,000), you are not required to pay provisional tax.
Once your earnings surpass the $5,000 threshold, you become liable for provisional tax. It can be complicated during the years when you cross the provisional tax threshold but still owe tax from a previous year when your earnings were lower. In such cases, you might find yourself paying both provisional tax for the current year and end-of-year tax from the previous year. We can provide guidance on how to manage this situation.
You can find more information on provisional tax on our website, and we are available to offer personalised advice tailored to your life and business. We ensure you don’t overpay tax, help determine the optimal frequency for your payments, and assist in maintaining steady cash flow. Feel free to reach out to us; we would be delighted to assist you.
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Aside from business consultation, we are business accountants Wellington who
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Address: Level 2, 182 Vivian Street,
Te Aro, Wellington 6011, New Zealand
Mail: PO Box 24-457, Wellington 6142
Phone: 04 889 2975
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